Setting up a fully-fledged online shop involves a lot of costs, resources and effort. You have to find suppliers, procure goods, set up a warehouse and build a system for order processing and delivery. However, there is another option that requires much less investment. This is the dropshipping model.
What is dropshipping?
Dropshipping is a direct delivery business. Otherwise, this model is also called dropshipping or drop trading.
When opening an online shop, there are three ways to sell goods:
- Setting up own production, storage and delivery;
- Buying goods from other companies in wholesale and reselling these products;
- Sale only. Storage and delivery are carried out by the supplier.
In the last case, the online shop acts as a product showcase and is not tied to a warehouse. This type of trade is called dropshipping.
Dropshipping is a sales system of an online shop in which the trader sells products without buying them in advance. The customer receives ordered items directly from the manufacturer.
Dropshipping is very popular in EU countries, especially in the e-commerce sector. This model has also proved successful in the CIS countries, as it makes it possible to set up an online shop without a large investment.
How does dropshipping work?
The entrepreneur creates an online marketplace, puts up all the information and product descriptions, recruits customers and sells these goods. But he does not have the dropshipping products himself; they are kept by the dropshipping supplier.
The entrepreneur then acts as an intermediary between the customer and the wholesaler or manufacturer. Revenue is usually earned from the difference between the wholesale and retail price of the dropshipped products. It is essentially a middleman.
There are 3 main subjects in this trading model:
- The wholesaler or manufacturer (dropshipping provider). His job is to produce the goods and store them. He also takes care of delivery problems.
- The seller. This is the online shop or dropshipper. He takes orders from customers and sells the producer’s products through his internet shop. The seller makes his profit by charging a mark-up on the goods.
- The buyer of the dropshipped products.
In this system, an online shop acts as a sales floor. It is an electronic shop window where all product information is visible to the potential buyer. There is no need to rent an office or warehouse for a dropshipping online shop. To become a dropshipper, all you need is a website or even a group on the official network.
Dropshipping works according to the following scheme:
- The online shop is the seller in this trading model. It searches for a suitable manufacturer or supplier. He concludes a contract with the latter.
- The seller displays the supplier’s dropshipping products in his online shop with a surcharge. He advertises the product and takes over its promotion.
- The buyer orders an item from the online shop and pays for it. The seller forwards all information about the order to the supplier.
- The dropshipping supplier delivers the product to the customer.
- Everyone has their profit. The manufacturer has additional sales market and receives payment from the retailer for his product. The seller makes a profit in the form of the difference between the wholesale and retail price. And the buyer gets the product he wanted.
Dropshipping is a relatively young phenomenon. But thanks to the development of internet technologies, it has already gained popularity. Dropshipping is especially attractive for those online shops that do not have much start-up capital to build their business.
Advantages and risks of dropshipping
The dropshipping model seems very tempting and simple. It is only a win-win situation for an online shop. But this model also has its advantages as well as its risks. Let’s go into the most important ones.
The online shop or seller has the following advantages in dropshipping:
- Easy quick start. Because the dropshipping model does not require physical interaction with the product, it is much easier to start and manage the business. You don’t have to worry about where and how to store the products, pack them, keep track of inventory, etc.
- Less capital investment. The seller does not need to buy dropshipping products in advance. First, the dropshipper sells these goods and receives payment from the customer.
- Flexible location. It is possible to trade anywhere using the dropshipping model. What is important here is a good internet connection to communicate with suppliers and buyers.
- Wide range of goods. Since there is no pre-purchasing in dropshipping, the seller is not bound by his budget. He can sell everything that the manufacturer offers. It is also possible to choose several dropshipping providers from different countries with different ranges of goods.
The manufacturer also gains from dropshipping:
- Additional sales markets. The more dropshippers the manufacturer has, the more income he gets.
- Savings on advertising costs. With dropshipping, the seller or the online shop takes over the promotion of goods. In this way, the manufacturer hardly spends any money on advertising his products.
- Customer database. In dropshipping, the seller handles all customer communication. But since the supplier takes care of the logistics of the goods, he still has the entire customer base.
Despite its apparent simplicity, dropshipping is not cliff-less. One should consider these risks before starting dropshipping, namely:
- Low income. Since dropshipping enables a quick start, it also brings high competition. To somehow attract customers and increase sales, the seller often lowers product prices, especially in the beginning. As a result, he has little income.
- No complete control over the business. This brings the following possible risks:
✓ Difficulties in delivery
✓ No complete information about stock data of the products
✓ Errors on the part of the dropshipping provider.
- Questions regarding the surname, exchange option and return of the goods.
- Trust in the supplier and in the seller. An unreliable supplier may poach customers and work with them directly, without a middleman.
It is also very important for suppliers to find reliable and experienced dropshippers. They trust more the online shops that are willing to work together in the long run.
Like every business model, dropshipping has its weaknesses and strengths. These advantages and risks must be taken into account before deciding on this form of commerce.
How to start dropshipping?
Before starting a trading business, you should thoroughly research the market. You need to decide what you want to sell and who will buy it.
Important steps to get started in dropshipping trading are therefore:
- Choosing the product niche. You can sell anything that is in demand. It is also important to choose products with minimal risk of return. Otherwise, the loss is on the intermediary, i.e. the seller.
- Choice of supplier. It is important not only to find a supplier, but also one that suits your business environment. Make a list of the criteria that are crucial for you in advance.
- Creation of a marketplace. Nowadays, an online shop is best suited for dropshipping.
- Negotiate and draw up a contract with dropshipping providers. Consider all details and risks and specify all important points in the contract.
- Customer advertising. It is the time to tell the world and potential customers about you. Promote your online shop and products and take orders.
In dropshipping, the analysis of the competitive environment also plays a significant role. It is important to constantly optimise your marketing strategy. The market is a changing phenomenon. In dropshipping, you should also be able to observe, analyse and react flexibly.
Dropshipping is an enticing trading model in today’s online world. It has its advantages, but also certain difficulties. But it is worth taking these risks. Dropshipping is particularly attractive for budding entrepreneurs who do not have a lot of capital at the start. Close cooperation and communication with the supplier helps avoid problems and develop your dropshipping online shop in the profitable direction.